DealLawyers.com Blog

This Weil blog takes a look at how market practices regarding fraud carve-outs in acquisition agreements have evolved in recent years, and says that while more parties are including definitions of fraud in their contracts than they have in the past, not all of those definitions are equally protective of selling stockholders.

The blog reviews some problematic carve-out language that has appeared in recent agreements, but goes on to conclude that most recent agreements seem to appropriately limit the definition of “fraud” to “just the morally egregious variety respecting the bargained for representations and warranties expressly negotiated as the actual factual predicates for the deal.”  In other words, the type of fraud that would vitiate a contractual non-reliance clause is limited to true intra-contractual fraud. 

The blog provides examples of the type of these intra-contractual fraud definitions found in the vast majority of recent transactions, and says that despite their variations, well crafted fraud definitions share a similar focus:

Unlike other defined terms for Fraud (which include both intra-contractual and extra-contractual fraud), a Fraud definition that is limited to intra-contractual fraud can hardly be said to have done damage to the basic premise of the no-reliance clause—i.e., a no reliance clause only disclaims reliance on extra-contractual statements and representations to begin with, so carving out from that disclaimer of reliance any intentional fraud respecting only the written representations and warranties seems to be a non-event.

The blog also says that drafters need to bear in mind that fraud carve-outs can create liability for innocent sellers, because the carve-out applies to indemnification claims against all sellers, and effectively eliminates the cap on indemnity or other protections. That makes it important to clarify that the carve-out only removes those limitations for the persons actually engaged in the fraud.

– John Jenkins